Properties Magazine February 2017 : Page 55

Legal Services Ground Leases & Downtown Redevelopment Can an old ground lease affect a property’s future? By Lori Pittman Haas Ulmer & Berne LLP O ver the last few years, downtown Cleveland has benefitted from the vision of developers who saw potential in historic buildings that could be repurposed in ways that lead to Cleveland’s renais-sance. We’ve seen buildings transformed from Board of Education headquarters to hotels, from office buildings to mixed-use (retail and residential), old bank buildings into grocery stores, and so on. But for real estate lawyers tasked with examining title for downtown properties, our “vision” was not about the future potential, but an analysis of how a real property’s past affects its future. A buyer’s objective (and the lend-er’s ideal) is for the buyer to own the fee interest in the real prop-erty. However, the existence of a ground lease impacts that objective. A ground lease is a lease of the land only. Usually a ground lease or land lease is for a relatively long period of time, sometimes up to 99 years. Some ground leases have renewal terms that can extend the term for another 99 years. The fee owner or ground lessor has a reversionary interest in the land. The ground lessee owns the improvements constructed upon the land. At the end of the term of the ground lease, the land goes back to the fee owner (ground lessor) and the improvements revert to the ground lessor or are required to be removed by the ground lessee, depending on the terms of the ground lease. In our examination of title for a few downtown properties, we encountered situations in which a bank is a trustee for a group of beneficiaries under a ground lease in which the seller of the real property was the ground lessee. Over time, the beneficial interests in the trust were often split into fractional shares, resulting in multiple beneficiaries under the trust. Further complicating the situ-ation was that the trust instrument was recorded after the deed of conveyance. Thus, from a legal standpoint, the bank is the fee owner but holds the asset in a fiduciary capacity under the terms of the trust instrument. As a result, if a buyer is successful in acquiring the fee interest and terminating the ground beneficiary may hold a very small fractional interest due to the original interest being split multiple times over the term of the ground lease; thus, the value of a beneficiary’s share may be negligible. Third, some beneficiaries like to be able to say that they “own” a piece of an iconic building in downtown Cleveland or a relative formerly owned the inter-est, so the emotional attachment to the building is priceless. Fourth, some beneficiaries simply cannot be located. In one case, the terms of the trust instrument provided that if a beneficiary held at least 75% of the beneficial interests, that beneficial interest holder could terminate the trust. Fortunately, the buyer was able to acquire at least 75% of the interest, terminate the trust and force a sale of the fee interest in the real property. Another peculiarity that we encountered in a ground lease for one downtown property was that a 1921 lease, the real property is not conveyed by a fiduciary deed since the bank is technically the fee owner. As buyer’s counsel, trying to effectu-ate the buy-out of a ground lease subject to these quirks is particularly chal-lenging for several reasons. First, one can’t simply make a deal with the fee owner because the fee owner holds the asset in a trust capacity. Second, each Landscaping Contracts – with Extraordinary Color Plans Planting, Design & Installation • Irrigation Installation & Repair Routine Ro out tine P ti t Property roperty ope pe y Ins Inspection s spec p ecti pec tion o & Maint Maintenance Maintena a te e na ace a c e &#10;&#17;&#13;&#12; &#07;&#13;&#12;&#18;&#16;&#05;&#07;&#18;&#0d;&#12;&#0b;&#03;&#0d;&#12;&#07;T HHNTIFJTGFIK&#03;&#03;GGNTFGMTEMMI&#03;&#03;&#17;'48+0)&#03;&#05;..&#03;1(&#03;&#12; &#03;&#13;*+1 www.propertiesmag.com 55